If you thought that the amendments in the Localism Act were going to solve all confusion regarding the tenancy deposit scheme – forget it!
There is presently a discussion raging (or there was, its cooled off a bit now) on my blog about rent v. deposits.
As you know, often when tenants are not able to pass normal referencing, landlords will require them to pay the full amount of the rent up front.
However this may not be such a good idea as they think – not if this money is actually deemed to be a DEPOSIT!
How, you might ask (and with good reason) can this be a deposit – its rent?
The legal definition
First of all, lets take a look at what the Housing Act 2004 (the one that set up the regulations) says about deposits (s 212(8)):
“tenancy deposit”, in relation to a shorthold tenancy, means any money intended to be held (by the landlord or otherwise) as security for–
(a) the performance of any obligations of the tenant, or
(b) the discharge of any liability of his,
arising under or in connection with the tenancy.
Rent is one of the obligations of a tenant under a tenancy.
People often think that deposits just cover damage, but they are also often used for unpaid rent, particularly at the end of the tenancy. Therefore money paid as security for rent can be a deposit.
The rent = deposit argument
So if you have a six month fixed term tenancy starting on 3 June where the rent is to be paid monthly in advance on the 3rd day of the month, and the tenant pays the whole six months on the 3 June – the argument goes that the bit relating to the next five months is really a deposit.
Which will therefore need to be protected.
There have been cases, County Court cases which are not binding on anyone admittedly, where money paid up front has been held as a deposit.
In one of these cases Piggott v. Slaven the judge was clearly right to find the money as a deposit as it was money previously paid as a deposit which the landlord chose to label as rent.
There has been a more recent case, Johnson v. Old where the Judge has found that three consecutive payments were actually a deposit. Unfortunately none of us know much about the facts of this case so it is difficult to say much more about it.
The trouble is, this can throw up all sorts of silly situations.
So in our example, we said that the five months worth of the rent paid on the rent due day of 3 June could be a deposit, as it was paid in advance.
What if, instead, just one month’s rent was paid, but it was paid two weeks in advance. Is that a deposit that needs protecting? Because if so it will stop being a deposit in two weeks time on the rent due date of 3 June. So if it does need protecting it will mean a lot of unnecessary administration.
What if the rent was paid by the tenant direct into the landlords bank account so he did not know how much was being paid or when it was paid. Will the landlord fall foul of the tenancy deposit regulation THEN?
Bear in mind that if money is a deposit, the landlord HAS to protect it AND serve the prescribed information within 30 days of receipt or he will be in breach.
And if he is in breach this will entitle the tenant to go to court and claim a penalty of between one and three times the rent AND in most cases the landlord will not be able to use section 21 unless he has refunded the ‘deposit’ money back to the tenant.
As one of those commenting on my blog said – that would be a nice little earner for the tenants.
I don’t know what the answer to all this is – none of us do.
My view is that if the money is credited to the rent account immediately and not held over, then it will not be a deposit. David Smith on the blog referred to a case which said that a payment can only be a deposit if there is an intention to return it if it’s not called upon.
However many of those commenting have said that landlords should protect themselves by saying in the tenancy agreement exactly how much rent should be paid and when (eg £5,000 on 3 June rather than £1,000 monthly payable on the 3 day of the month).
If you do this though, it is a good idea to make the final month’s rent payable ‘normally’ otherwise you may find that you have to give six months notice for s21 notices served during any subsequent periodic tenancy!
Like the other pre Localism Act problems with the tenancy deposit legislation, we won’t get an answer to all this until a case comes before a court of record – ie the High Court or (preferably) the Court of Appeal.
Until then, we really don’t know.